Monthly Economic Review: New Zealand

New Zealand just recently released its trade data, and it was terrible. But why did forex traders send the Kiwi higher across the board rather than dump it? Is there something else in the underlying fundamentals? Well, time to find out!

Trade

New Zealand’s trade deficit ballooned from NZD 726 million back in July to NZD 1,035 million in August. This is now the third consecutive month that New Zealand’s trade gap has widened.

Forex Chart: Middle-Earth's Trade Balance

According to the details of the report, the deficit was due to imports increasing much faster than exports, with exports rising by 5.6% due mainly to meat and fruits, and imports rising by 19% (Gasp!) due primarily to capital goods.

On the surface, the trade data looks horrible for New Zealand, but as I already mentioned, the higher imports was due mainly to an increase in capital goods, which is a bit promising. To the newbie forex traders (and non-economists) out there, capital goods basically refer to goods which are used to produce other goods or services, such as factory equipment.

In New Zealand’s case, total capital goods saw an amazing 33% increase, with transport equipment (mainly aircraft) rising by an unbelievable 71%. The overall increase in capital goods could mean higher productivity in the future while the increase in transport equipment is most likely linked to New Zealand’s improving tourism industry, which just posted a 7.4% year-on-year increase in international visitor arrivals for the month of August.

In fact, the Reserve Bank of New Zealand (RBNZ) pointed to New Zealand’s “robust” tourism industry as one of the major components supporting New Zealand’s economy in their September 10 monetary policy statement. Also, Air New Zealand is currently replacing its fleet of Boeing 737-300s with A320s, which probably helps to explain the ridiculous 71% increase.

The above-mentioned long-term implications also help to explain why forex traders chose to buy up the Kiwi rather than go on a Kiwi selling spree shortly after New Zealand’s trade data was released, although Big Pippin vehemently insists that the actual reason for the Kiwi’s reaction is that most Kiwi pairs were at the bottom of their respective trading ranges, so technicals were in play rather than the fundamentals. NZD/USD, for example, is supposedly trapped between 0.6250 and 0.6420.

NZD/USD 1-hour Forex Chart

NZD/USD 1-hour Forex Chart

Getting back on topic, dairy products, which account for around 25% of New Zealand’s exports, fell by around 7.5% in August. But on a more upbeat note, dairy prices have been making a recovery since the later half of August, which could alleviate some of the pain.

Forex Chart: Middle-Earth's Export Components

Forex Chart: Dairy Trade

Consumer Sentiment

The people of Middle-Earth, uh, I meant New Zealand are still optimistic since the Westpac: McDermott Miller New Zealand Consumer Confidence Index (CCI) for the September quarter printed a 106.0 reading, but consumer confidence slipped drastically from the previous quarter’s 113.0.

Forex Chart: Middle-Earth's Consumer Confidence

According to the report, 15% of the respondent are expecting bad times in the near-term, with 29% of metropolitan consumers blaming “ineffective government economic policy” and 39% of rural consumers blaming “low dairy prices.” Some employees also don’t feel very secure with their jobs, with 16% of private sector employees expecting bad times ahead, which is a significant switch from the previous quarter’s reading wherein 5.4% of the respondents were thinking happy thoughts. Well, it’s natural for people to be worried, I guess. After all, the jobless rate for Q2 2015 did tick higher to 5.9% (5.8% previous).

Business Sentiment & Conditions

Consumers are still a happy bunch, but businesses are another story altogether since ANZ’s business confidence survey for August just dug itself deeper into negative territory. The main party pooper was the agricultural sector, which posted a very pessimistic -75.6 for the “business confidence” component, a -28.2 for the “activity outlook” component, and a -18.1 for the “exports” component.

Forex Chart: Middle-Earth's Business Confidence

Compare this with the manufacturing sector, which posted a -31.8 for the “business confidence” component, a +9.4 for the “activity outlook” component, and a +19.0 for the “exports” component.

Regarding the “activity outlook” component for the manufacturing sector, this is corroborated by Business New Zealand’s manufacturing PMI, which posted a 1.3 points increase to 55.0 for the month of August.

Forex Chart: Middle-Earth's Manufacturing PMI

Growth

New Zealand’s Q2 GDP grew by 0.4%, which is a bit better than Q1’s 0.2%. But on an annualized basis, it only grew by 2.4%, which marks the second consecutive quarter of slowing annualized growth.

Forex Chart: Middle-Earth's GDP

The main drivers for the quarter-on-quarter increase were the 3.0% increase in agriculture due to higher dairy production, followed by a 2.5% increase in mining and a 2.3% increase for business services. The main drag, meanwhile, was a 1.8% decrease in transport services “due to decreases in road transport and transport support services.”

But based on the downward trends for trade data, consumer sentiment, and business conditions above, forex traders can probably expect Q3’s GDP growth to slow down a bit.

Summary & Potential Effects on the Forex Market

Well, the current data aren’t exactly painting a pretty picture for New Zealand, but at least the manufacturing sector seems to be picking up. The increase in imports for capital goods is a good sign too, so New Zealand and the Kiwi could potentially see better times ahead, which is probably why forex traders are keeping the Kiwi supported. Big Pippin, insists that forex traders are just trading the ranges, however. And looking at the Kiwi pairs, most of them are indeed moving inside rather obvious trading ranges.

In the nearer term, the recent slew of poor data may convince the RBNZ to cut rates some more. After all, RBNZ Governor Graeme Wheeler did warn that “some further easing in the OCR seems likely.”